Wednesday, October 18, 2006

As many of you know, China's forex reserve is surpassing the 1 trillion USD mark as we speak. There is an emerging debate, both among Western analysts and Chinese officials, about whether to spend some of the money for domestic purposes. On the one hand, since the PBOC spend considerable effort in sterilizing forex inflows with bond issuance, it would be self-defeating to then "spend" some of the money, which puts the money back into the economy. On the other hand, there are those--I guess including myself--who say that why not? Given the end of the housing bubble after Chen Liangyu's arrest, the SAFE can set up a company that buys special social security bonds from the MOF denominated in either USD or yuan. Come to think of it, why not issue a bond in which SAFE pays USD to the MOF for the bonds (which the MOF give right back to SAFE for RMB cash), but then the MOF promises to pay SAFE back in RMB. In this manner, wouldn't SAFE's portfolio be diversified and be hedged against the declining dollar? Since MOF is taking in RMB taxes, it wouldn't necessarily take a loss.

By Yanping Li
Oct. 16 (Bloomberg) -- China's foreign-exchange
reserves are not for ``spending'' on buying assets
including oil, the official Shanghai Securities News
reported, citing the Chinese central bank's Vice
Governor Wu Xiaoling.
Foreign-exchange reserves are assets on the
central bank's balance sheet, and anyone who wants to
use them ``needs to buy them'' from the People's Bank
of China, Wu told an Oct. 14 banking conference, the
paper said. China's reserves, the world's
largest, jumped 28.5 percent to $988 billion at the
end of September from a year earlier, according to
central bank data.

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